Investors end August wishing they were at the beach

In something of a counter trend reading, last week’s release of the Chicago Fed National Activity Index, released Monday, reflected an incremental slowdown in activity. For the month of July the reading came in at -0.01, versus consensus that was calling for an uptick to 0.22. The previous month was raised from 0.13 to 0.16. At its core, the measure is considered a pure and multifaceted gauge of inflation at a national level. As we know, July was a solid month for employment gains—particularly in the retail sector. That said, housing permits provided a negative drag to the reading, more than offsetting the lift provided by the jobs narrative. The FHFA House Price index also was a bit underwhelming. On a month-over-month basis, consensus was calling for 0.5%, and it came in at 0.1%. Year-over-year the index reading was 6.5%.

As expected and as telegraphed by the prior week’s Empire State manufacturing reading, both the Richmond Fed’s Manufacturing Index and the Kansas City Fed’s Manufacturing Index reflected expansion. Richmond came in at 14 versus consensus of 11. Kansas City came in at 16 versus July’s 10. The Markit Economics PMI Composite Flash for August was 56 versus consensus calling for 54.3 and up from July’s 54.2. The strength provided by the services vertical in the report (56.9) provided much of the lift. Weekly jobless claims continue to reflect a tightening job market. For the week of August 19, claims inched lower to 234k (c. 237k). Any further gains from these readings will be increasingly more difficult as the US economy has clearly achieved full employment. Theoretically, this level of employment should begin pushing on wage inflation but that has been the assumption for much of the past four months, if not longer, and we have not seen much follow through on the inflation front.

New home sales data released midweek definitely triggered a bit of caution for investors in that the reading came in well below consensus expectation. For July it was 571k versus consensus calling for 610k and against the backdrop of June’s revised 630k. Clearly, rising prices and tight housing markets across much of the country have both acted as drags on sales.

All in all, last week we saw modest equity market gains as a result of a singular theme—the reemergence of the tax reform narrative in Washington. That lift to the broader market was largely the result of outperformance by financials and banks. Tax reform narrative aside, markets also managed to glean some support from the energy sector at the conclusion of last week as a result of concerns over the impact of hurricane Harvey.

The annual Kansas City Fed Economic Symposium in Jackson Hole provided little in the way of the unexpected. The narrative provided by those speaking at the symposium did not focus on stimulus spending, monetary policy, or even the current state of the economy. Rather, Fed Chair Yellen and ECB’sMario Draghi both chose to give speeches that underscored two principle themes: the need to avoid rolling back financial regulations in a post financial crisis world and a shared posture toward continued monetary policy accommodation in support of GDP expansion and overall domestic and global economic health. One additional theme that Draghi focused on was the importance of free trade in an increasingly interconnected world. Importantly, Draghi did emphasize the central significance of fairness, safety and equity in his remarks on trade. Observers of the symposium were clearly left with some unanswered questions. At the top of that list are the timeline for Federal Reserve balance sheet reduction, clarity on the ECB’s aspirations in regard to tapering, and any clue of how to harmonize a rising global interest rate landscape with balance sheet reduction.

Among this week’s scheduled economic releases, several will be critically important for investors. We receive the second Q2 GDP estimate on Wednesday. As you know the initial reading for Q2 GDP was 2.6%. Consensus is calling for a revision higher to 2.8% with this release. Additionally, the consumer spending component of the reading is expected to rise from an initial 2.8% to 3.0%. Over the past two weeks we have received manufacturing measures from New York State, Kansas City and Richmond. This week we receive the Dallas Fed’s Manufacturing. Survey. The ADP Employment Report due out Wednesday is expected to reflect a gain of 182k. Chain store sales and motor vehicle sales and August’s Employment Report round out the week. August’s Employment Report is expected to reflect a gain of 180k and an unchanged unemployment rate of 4.3%. Otherwise, the other components of the report, on the edges, are not expected to move much. Any signs that the labor force participation rate is rising (even fractionally), that hourly earnings are rising, or that the average work week is rising, would be welcome.

As we have discussed, much of our recent equity market weakness has been as a result of the lagging tech sector. Last week was no exception. Apart from Apple (AAPL), the large cap tech space, and the Nasdaq (^IXIC, QQQ) by proxy, remain susceptible to further downward price action. Energy (XLE) should continue to provide a degree of lift to the S&P 500 (^GSPC, SPY), and as long as the tax reform narrative remains in play, financials (XLF) and the Dow (^DJI, DIA) should benefit. We enter the last week of August with our uptrend under pressure, volume contracting and equity traders wishing they were anywhere else other than on the desk … like at the beach.